By: Jack Findaro, Product Development Director
Gas Station Inquiries
As the trusted business advisor to many foreign nationals looking to move to the U.S. on an E-2 visa, we at Visa Franchise have received numerous inquiries regarding the viability of gas station investments like Chevron, ExxonMobil and Shell. Many clients express interest in gas stations as many have owned or currently own gas stations that generate solid profits for them and their family back in their home countries. From our deep-dive research and conversations with various gas station brokers and experts, Visa Franchise strongly believes that there are other potential E-2 business visa investment options as well as EB-5 business visa investment options that are available and have significantly higher potential for return on capital.
1. Due Diligence Issues
Most available gas station investments involve existing gas stations that are for sale, which brings many issues with due diligence. Unless the gas station is in a rural area of the U.S., it is very difficult to find an available urban location. Therefore, many times the only option would be to buy an existing gas station business. However, many due diligence issues arise with buying any existing business, especially an existing gas station. For instance, the financial figures in particular are likely to be inflated and fraudulent. It is important to consider that if a gas station is actually earning money and a good return on investment then it would be extremely rare for the owner to want to sell the business. A good question to ask is – why would any want to sell a profitable, operationally simple business?
2. Cost and Time of Due Diligence Process
If one does decide to buy an existing gas station, then they would be strongly advised to perform an in-depth due diligence of the gas station business. While gas station brands such as Chevron, ExxonMobil and Shell are well known and public companies, it is the individual franchisees that are the ones who would be providing the financial figures for a potential investment in an existing gas station. Performing a proper due diligence is a costly and time consuming endeavor. Costs can range in the thousands of dollars as the company or person performing the due diligence should be well-qualified with years of experience performing due diligences (generally an attorney or accountant). In addition to the costs, the time it takes to perform the due diligence, including everything from waiting for the seller to supply the proper documents to having the due diligence expert examine and review the documents with the seller, can be quite a long time. Many of our clients and their families that are looking to move to the U.S. through investment in an E-2 visa business or EB-5 visa business intend to move to the U.S. as soon as possible. Buying an existing business, unless it is from a very reputable and regulated source, will only delay the time it will take for the investment to occur and the move to the U.S. to happen.
3. Difficult to Scale
When comparing gas stations to business in other sectors, gas stations are significantly more difficult to scale. The first obstacle to scalability with gas stations comes in the form of the high level of investment. Without a large amount of capital to invest, it would be quite difficult to scale the business and buy additional gas stations. A second obstacle that would need to be overcome is to find nearby gas stations that are for sale. This can prove extremely difficult in more urban and suburban markets. Additionally, the inability to purchase viable land that can have a gas station can greatly limit the options for expansion in the industry. Lastly, the need for owner to focus on operations of the existing gas station gives them little time to focus on multiple stations at once, especially if they are not geographically close to one another. All of these obstacles combined make investing in a gas station and scaling the business an extremely difficult endeavor.
4. Owner-Operator Model of Gas Stations
The majority of gas stations in the U.S. are owner-operated businesses. According to the in-depth NACS 2015 Retail Fuels Report, 58% of gas stations in the U.S. are owner-operated. The driving force behind this has to do with gas station business model where it may be quite difficult for an operator to generate enough revenue and profits in order to hire a general manager. This means that the gas station owner needs to spend more of their time working at the station in order to achieve a better return on their investment. At Visa Franchise, many of our clients prefer businesses that they would start operating themselves before moving to a more executive role as the business matures, and gas stations typically do not present this opportunity to investors.
5. Highly Competitive Market
Gas station operators must deal with the fact that they are competing in a highly competitive market in the U.S. We believe that at the base of it, the gas station business is a relatively simple business concept, especially in relation to other businesses. This simplicity has attracted a wide range of business owners from small operators to some of the largest multinationals like Wal Mart. The wide array of market players has turned the gas station industry into a highly competitive market landscape.
Many foreign nationals have already come to the U.S. over the years to open gas stations due to their familiarity with owning and operating gas stations in their home countries. While there might have been more opportunities in the past to open successful gas stations, many of those opportunities are no longer available in today’s market.
Here is a list of the most popular gas stations:
- Murphy (Wal-Mart)
- Sam’s Club (Wal-Mart)
Only some of the above brands franchise and the others are companies with revenues in the billions of dollars. As a foreign national entering the U.S., would you really want to enter this fiercely competitive market?
6. Gas Stations are a Low Margin Business
By their very nature, gas stations are a low margin business in the U.S. The low margins of the business is due to the combined result of a few different factors. As previously mentioned, the highly competitive nature of the business pressures the profitability of the business. Additionally, the commodity nature of gas means that the price that the gas is sold for will be quite close to the purchase price, and thus acts as a downward force on gas margins. Another factor that decreases margins for gas stations is the lack of consumer loyalty to a particular gas station. When consumers do not feel any affinity towards one gas station or another, they will simply look for the gas station that is most convenient where they can buy gas for the lowest price. One of the most interesting discoveries that Visa Franchise made during our deep-dive research into the industry is the fact that many gas station businesses make the large majority of their profits from the convenience store that they operate. At the end of the day, it would be a much cheaper investment to simply open up a well located convenience store instead of a gas station, as gas stations only make a few cents profit per gallon of gas. All of these factors combine to exert downward pressure on gas station margins, and thus act to decrease the return on investment for gas station owners and operators.
7. Environmental Issues
Gas stations bring with them a whole host of environmental issues, especially the older gas stations. A large number of existing gas stations have been and currently are in violation of environment codes. If an investor decides to buy an existing gas station, then the investor would then inherit the environmental code liabilities which could range from thousands to tens of thousands of dollars. Even performing a due diligence on the gas station does not guarantee that there would be no environment liabilities and costs that the new owner of the gas station would have to deal with. As time goes on, the environmental regulations in the U.S. are likely to only become more stringent, which in turn increases the cost it takes to fix any environmental problems related to a gas station.
8. Safety Concerns
Many of Visa Franchise’s clients are moving to the U.S. for the safety and security of their family. In 2012 alone, more than 7,100 robberies occurred at gas stations across the United States. Each robbery averaged nearly $1,000 stolen from the gas station operator. Between 2004 and 2008, there were an average of 5,020 fires reported at gas stations annually. That’s about one fire for every 13 service stations! Certainly there are many other E-2 eligible investments and EB-5 eligible investments in industries that have much lower safety risks.
9. Changing Market Landscape
Many articles and research reports have been coming out recently detailing the changing car landscape. Due to ride-sharing apps like Uber and Lyft, battery powered cars, and driverless cars, there exists a strong consensus that in the coming years the gas market and demand will look significantly different from today. Many experts are forecasting that by 2020 driverless, battery powered cars will be on the roads, which will have a significant negative impact on the demand for gas stations. All of the above trends combined will likely begin to significantly negatively impact the investment return of gas stations.
10. High Investment Business
Gas stations represent a relatively high investment, especially when compared to other businesses that an investor can open for the same investment level. To buy an existing gas station it typically costs a few hundred thousand dollars up to well over one million depending on the success of the gas station and land cost. For a much lower investment amount, there are many business opportunities available that can quickly generate profits, are scalable, and are high margin businesses. For this reason, many Visa Franchise clients that initially inquire regarding gas station investments for their investor visa eventually choose to invest in businesses in other industries when they analysis the options available to them that Visa Franchise provides as part of our service. We have been working with a number of different emerging business concepts that we believe represent very strong business cases in growing industries that have the potential for the investor to achieve a comparatively quicker return on capital when compared to gas stations.
Gas Station Options Availability
Having detailed all of the above points, if a client is still interested in an existing gas station business, Visa Franchise does help with finding existing opportunities alongside gas station brokers that have available gas stations for sale. However, most gas stations we have reviewed and analyzed so far are high level investments with sub-par finances.
While gas stations might appeal to the foreign national investor looking for an E-2 visa business or EB-5 visa business, there are many other great investment opportunities in industries other than gas stations that are surely worth reviewing. Visa Franchise is here to offer advice and support to foreign nations who are who have investment interest in a wide range of industries.
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